nobel-laureates-in-economics

"Today, I know better. As I will try to explain, one of the main lessons from working on incentive problems for 25 years is that within firms, high-powered financial incentives can be very dysfunctional and attempts to bring the market inside the firm are generally misguided. Typically, it is best to avoid high-powered incentives and sometimes not use pay-for-performance at all."

"The United States can't keep a completely open system if the rest of the world is less open. The United States may have to take a leaf out of the book of Japan, China, and Germany, and have protectionism inside the system."

"The idea that the euro has "failed" is dangerously naive. The euro is doing exactly what its progenitor – and the wealthy 1%-ers who adopted it – predicted and planned for it to do."

"Consider John Kenneth Galbraith or Lester Thurow, both leading economists in the view of the general public, both with all the formal qualifications, both totally ignored by the academic mainstream. Or consider Robert Mundell, who is still revered for his contributions to international monetary theory, yet whose later incarnation as the father of supply-side economics has similarly been ignored."

"Mundell’s models allowed a significant role for fiscal policy, especially under fixed exchange rates. However, the treatment was entirely Keynesian—an increased budget deficit operated solely by raising the aggregate demand for goods. Moreover, increases in government spending and cuts in taxes had pretty much the same effect on the economy."

"The euro is the way in which congresses and parliaments can be stripped of all power over monetary and fiscal policy. Bothersome democracy is removed from the economic system."

"My decision to leave applied mathematics for economics was in part tied to the widely-held popular belief in the 1960s that macroeconomics had made fundamental inroads into controlling business cycles and stopping dysfunctional unemployment and inflation."

"What theory can we use to get us out of the impending slump quickly and reliably? To use the 'new classical' theory of fluctuations begun at Chicago in the 1970s – the theory in which the "risk management" models are embedded – is unthinkable, since it is precisely the theory falsified by the asset price collapse. The thoughts of some have turned to John Maynard Keynes. His insights into uncertainty and speculation were deep. Yet his employment theory was problematic and the 'Keynesian' policy solutions are questionable at best....At the end of his life Keynes wrote of 'modernist stuff, gone wrong and turned sour and silly'. He told his friend Friedrich Hayek he intended to re-examine his theory in his next book. He would have moved on. The admiration we all have for Keynes's fabulous contributions should not sway us from moving on."

"The stampede toward “rational expectations” — widely thought to be a “revolution,” though it was only a generalization of the neoclassical idea of equilibrium—derailed the expectations-driven model building that had just left the station. In the end, this way of modeling has not illuminated how the world economy works."

"When public spending in the form of transfer payments makes various services and benefits free of charge, work is discouraged. Yet it is precisely Social Security that legislators fear to cut"

"Market Anti-Inflation Plans In such a context, it should be clear that balancing a nominal budget will solve nothing, and attempting to achieve such a spurious balance will produce much mischief."

"WILLIAM VICKREY DIED on October 11, 1996, three days after the announcement that the 1996 Bank of Sweden prize in economic sciences in memory of Alfred Nobel was being awarded to him and to Professor James Mirrlees of Cambridge “for their fundamental contributions to the economic theory of incentives under asymmetric information.” Vickrey was eighty-two years old and had been a member of the National Academy of Sciences since April 1996. The press release from the Royal Swedish Academy of Sciences refers specifically to his work in the mid-forties on income taxation, then in the early sixties on auctions. With characteristic independence, Vickrey reacted by privileging instead his work of the late thirties on cumulative averaging of income for tax purposes and his then current concern with unemployment. Early insights, lifetime dedication, and late recognition are unmistakable traits of a truly remarkable career devoted to economics in the service of the public sector."

"The question that I first asked was, why was progress . . . speeding up over time? It arises because of this special characteristic of an idea, which is if [a million people try] to discover something, if any one person finds it, everybody can use the idea."

"Many people think that dealing with protecting the environment will be so costly and so hard that they just want to ignore the problem. I hope the prize today could help everyone see that humans are capable of amazing accomplishments when we set about trying to do something."

"Economic growth springs from better recipes, not just from more cooking. New recipes produce fewer unpleasant side effects and generate more economic value per unit of raw material."

"Presenting a model is like doing a card trick. Everybody knows that there will be some sleight of hand. There is no intent to deceive because no one takes it seriously. Perhaps our norms will soon be like those in professional magic; it will be impolite, perhaps even an ethical breach, to reveal how someone’s trick works."

"A crisis is a terrible thing to waste."

"The amazing thing about cities is that they're worth so much more than it costs to build them."

"Romer demonstrates how knowledge can function as a driver of long-term economic growth. . . . Previous macroeconomic research had emphasised technological innovation as the primary driver of economic growth, but had not modelled how economic decisions and market conditions determine the creation of new technologies. Paul Romer solved this problem by demonstrating how economic forces govern the willingness of firms to produce new ideas and innovations."

"You will almost never see an economist whom the academics themselves regard as important or interesting. For example, niether Robert Lucas, without question the most influential economic theorist of the 1970s, nor Paul Romer, arguably the most influential theorist of the 1980s, has ever appeared on any public affairs program."

"Paul's insight is that the infrastructure for creating new ideas is the engine room of economic growth. So we need to pay attention to patents, the number of scientists that are out there, the incentives to do science. And as long as we can keep generating new ideas, we can keep generating economic growth."

"We've maintained accelerating growth over time [in part because of] changes in our institutions. We have things like universities . . . patent laws, [and] research grants which have created incentives for those individuals [who develop innovations] to engage in more discovery. . . . [T]he rules of the game create incentives . . ."

"My own view is that there basically is no alternative to a market solution. The reason is, if you look around, who are we talking about that’s going to solve the problem: it’s you and me. There are billions of individuals, millions of firms, thousands of governments, hundreds of nations, and for them to take action, they’re going to have to have incentives. The kind of incentives we’re talking about; they’re not speeches - we can sermonize all day - but the incentives of market prices. [This requires us to] raise the prices of goods and services that are carbon intensive, and to lower the ones that are less carbon intensive."

"In the mid-1990s, [Nordhaus] became the first person to create an integrated assessment model, i.e. a quantitative model that describes the global interplay between the economy and the climate. His model integrates theories and empirical results from physics, chemistry and economics. Nordhaus’ model is now widely spread and is used to simulate how the economy and the climate co-evolve."

"We have to be grown-ups, I think [when discussing the payment of funds today to prevent climate harm which may be decades in the future]. There are lots of things we do where the investments come way, way in the future. Educating 4-year-olds . . . that's an investment that goes way into the future as well."

"When I talk to people about how to design a carbon price, I think the model is British Columbia. You raise electricity prices by $100 a year, but then the government gives back a dividend that lowers internet prices by $100 year. In real terms, you’re raising the price of carbon goods but lowering the prices of non-carbon-intensive goods."

"Putting a low price on valuable environmental resources is a phenomenon that pervades modern society. Agricultural water is not scarce in California; it is underpriced. Flights are stacked up on runways because takeoffs and landings are underpriced. People wait for hours in traffic jams because road use is unpriced. People die premature deaths from small sulfur particles in the air because air pollution is underpriced. And the most perilous of all environmental problems, climate change, is taking place because virtually every country puts a price of zero on carbon dioxide emissions."

"Carbon prices must be raised to transmit the social costs of GHG emissions to the everyday decisions of billions of firms and people."

"There are still people who discuss industrialization as... an alternative to agricultural improvement... this approach is without meaning in the West Indian Islands. There is no choice... between industry and agriculture. The islands need as large agriculture as possible... It is not ... that agriculture cannot continue to develop if industry is developed … the opposite is true: agriculture cannot... yield a reasonable standard of living unless new jobs are created off the land"

"I had no idea in 1933 what economics was, but I did well in the subject from the start, and when I graduated in 1937 with first class honours LSE gave me a scholarship to do a PhD in industrial economics."

"An approximately linear income tax schedule is desirable; and in particular negative income tax proposals are strongly supported,"

"My interest in overhead costs was the structure of prices in situations where average cost per unit exceeds marginal cost. The Pareto rule was that price should equal marginal cost, but to apply this rule would bankrupt the firm. In practice, such situations oscillate between bankruptcy and monopoly, as in the airline industry today. The general inclination of economists in those cases was to enforce marginal pricing and subsidize firms to the extent of the differences between marginal and average cost. This was hardly practical, as an industry-wide policy. Neither could it be justified, as many taxpayers would be forced to pay for services that they did not use. If one started from the premise that those who use the service should pay for it, the problem reduced to how to spread the fixed costs among the users. Here I started from the railway principle of “charging what the traffic will bear” and linked up with the new price discrimination theory, as elaborated by Joan Robinson. Another aspect of overhead costs was the time dimension. Demand was not steady, but fluctuated. If the output could not be stored, there would be times of idle capacity, regular or irregular; how was the cost of this to be shared? I demonstrated that the correct approach to this problem was to treat the fixed investment as a producer in joint cost of different outputs at different times, each paying what it could bear, and subject to the sum of payments not exceeding total cost."

"What does an income tax schedule look like, which takes account of the trade-off between equity and efficiency? This question was first asked by Mirrlees (1971) who developed the standard model of the optimal nonlinear income tax. Since then innumerable papers have generalized, refined, or corrected his analysis. It has also been realized that the second-best approach to income taxation pertains to a wide variety of economic problems such as monopoly pricing or contract theory in general. In this respect Mirrlees’ article has opened an important and fascinating strand of economic thought."

"There is no way to predict the price of stocks and bonds over the next few days or weeks. But it is quite possible to foresee the broad course of these prices over longer periods, such as the next three to five years. These findings, which might seem both surprising and contradictory, were made and analyzed by this year’s Laureates, Eugene Fama, Lars Peter Hansen and Robert Shiller."

"Firms that have a high BE/ME (a low stock price relative to book value) tend to have low earnings on assets. Conversely, low BE/ME (a high stock price relative to book value) is associated with persistently high earnings."

"I view the work I've done related to statistics and economics as roughly speaking, how to do something without having to do everything. So economic models -- how any model by definition isn't right. When someone just says, 'Oh, your model is wrong.' That's not much of an insight. What you want to know is, is wrong in important ways or wrong in ways that are less relevant? And you want to know what does the data really say about the model?"

"The question is when is good? The answer is never."

"This [covariance] is something that is not in the habit of thinking of most amateur investors. They look at their investments one at a time, and they don't, you always have to go back and say, what's the covariance? That's what really matters for what happen to your portfolio. Because when you invest in a lot of companies that are all the same, you're asking for trouble, because the whole thing is going to either blow up or succeed. And you can't live like that. You have to be looking for low covariance."

"Each individual family, then, does almost as well with a good rule of thumb as it would with perfect rationality—close enough to make perfect rationality an irrational goal. But now comes Akerlof's big insight: "near-rational" behavior and perfectly rational behavior have very different implications for policy."

"If active managers win, it has to be at the expense of other active managers. And when you add them all up, the returns of active managers have to be literally zero, before costs. Then after costs, it's a big negative sign"

"To understand the economy then is to comprehend how it is driven by the animal spirits. Just as Adam Smith’s invisible hand is the keynote of classical economics, Keynes’ animal spirits are the keynote to a different view of the economy — a view that explains the underlying instabilities of capitalism."

"I was reminded of how much I had misjudged the potential the profession would see in the time series rational expectations models. When I, as a graduate student at the Massachusetts Institute of Technology (MIT) around 1970 did some work on the econometrics of rational expectations time series models, I felt rather apologetic about the extreme assumptions in the models. I did not expect others to regard them as anything more than a passing gimmick. Richard Sutch had just written in his MIT doctoral dissertation (1968) an exposition of the coefficient restrictions implied for time series representations of long-term and short-term interest rates, but he never bothered to publish this work. I remember conversations with him and others about rational expectations models, and I did not come away thinking they were the wave of the future."

"If assets are priced rationally, variables that are related to average returns, such as size and book-to-market equity, must proxy for sensitivity to common (shared and thus undiversifiable) risk factors in returns. The time-series regressions give direct evidence on this issue. In particular, the slopes and R2 values show whether mimicking portfolios for risk factors related to size and [book-to-market] capture shared variation in stock and bond returns not explained by other factors."

"Although size and book to market equity seem like ad hoc variables for explaining average stock returns, we have reason to expect that they proxy for common risk factors in returns."

"The empirical successes of [the three-factor model] suggest that it is an equilibrium pricing model, a three-factor version of Merton’s (1973) intertemporal CAPM (ICAPM) or Ross’s (1976) arbitrage pricing theory (APT). In this view, SMB and HML mimic combinations of two underlying risk factors or state variables of special hedging concern to investors."

"Our results are disturbing in that, like Fama and French (1992), they suggest that traditional measures of risk do not determine expected returns. In equilibrium asset pricing models the covariance structure of returns determines expected returns. Yet we find that variables that reliably predict the future covariance structure do not predict future returns. Our results indicate that high book-to-market stocks and stocks with low capitalizations have high average returns whether or not they have the return patterns (i.e., covariances) of other small and high book-to-market stocks. Similarly, after controlling for size and book-to-market ratios, a common share that ‘act like’ a bond (i.e., has a low market beta) has the same expected return as other common shares with high market betas."

"There is no way to predict the price of stocks and bonds over the next few days or weeks. But it is quite possible to foresee the broad course of these prices over longer periods, such as the next three to five years. These findings, which might seem both surprising and contradictory, were made and analyzed by this year’s Laureates, Eugene Fama, Lars Peter Hansen and Robert Shiller."

"I must confess that I had expected the rigorous analysis of income taxation in the utilitarian manner to provide arguments for high tax rates. It has not done so."

"People want more and more leisure time which means the freedom to do what they want to do, not what they have to do, and as we get richer and richer, more and more people will be able to afford that."

"The president has very little effect on the economy. If you want to put blame or credit, the main person who influences the business cycle is the head of the Federal Reserve Bank."